HMRC officials are urging employers running employee benefit trusts to come forward following the Supreme Court ruling against the company that formerly owned Rangers Football Club.
They say there could be wide-ranging implications for businesses that support tax avoidance schemes.
The issue arose after Revenue officials took action against the former incarnation of Rangers Football Club, RFC 2012 PLC, which is now in liquidation.
The company had set up an employee benefit trust to avoid liability to income tax and national insurance contributions. The sums were invariably re-settled, on the exercise of the trustees’ discretion and further to a loan application by the employee, to a sub-trust in accordance with the employer’s recommendation and the employees’ wishes.
HMRC assessed income tax on the sums paid as remuneration. The company appealed. The First-tier Tribunal and Upper Tribunal held that the trusts and loans were not shams, and that the scheme was effective in avoiding liability for income tax.
However, the Inner House upheld HMRC’s argument that the scheme involved a redirection of the employees’ earnings and did not therefore exclude those earnings from the charge to income tax, or remove the employer’s liability to pay income tax under the PAYE system.
The Supreme Court has now upheld that decision. It held that, as a rule, the charge to tax on employment income extended to money that an employee was entitled to have paid as their remuneration, whether paid to the employee or a third party.
David Richardson, director general of HMRC’s customer compliance group, said: “This decision has wide-ranging implications for other avoidance cases and we encourage anyone who’s tried to avoid tax on their earnings to now agree with us the tax owed.
“HMRC will always challenge contrived arrangements that try to deliver tax advantages never intended by parliament.”
The ruling will not affect Rangers FC in its current formation, as the action was taken against RFC 2012 PLC. However, creditors of RFC may lose out, as some of the money that might have gone to them pending the outcome of the case will now go to HMRC.
The former Rangers chairman Sir David Murray, told the Guardian newspaper that he was “hugely disappointed” with the verdict. “The decision will be greeted with dismay by the ordinary creditors of the club, many of which are small businesses, who will now receive a much lower distribution in the liquidation of the club […] than would otherwise have been the case.”
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Case featured:
HMRC sends warning to employers after Rangers tax ruling
RFC 2012 PLC (In Liquidation) (FORMERLY THE RANGERS FOOTBALL CLUB PLC) v ADVOCATE GENERAL FOR SCOTLAND (2017)
SC (Lord Neuberger PSC, Lady Hale DPSC, Lord Reed JSC, Lord Carnwath JSC, Lord Hodge JSC) 05/07/2017